My 2 best mid-cap stocks for income and growth

Should you be tempted by the dividend growth potential of these two mid-caps?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today, I’m taking a look at two mid-cap stocks and offering some ideas for why growth and income hunters should check them out.

Weighty retail presence

First off, it’s payment services company PayPoint (LSE: PAY). With over 29,000 PayPoint terminals operating in the UK, the company has a weighty retail presence in an industry where scale is paramount.

Clients, ranging from utility and media companies to government organisations, prefer to use a single payments solution, and so too do customers, for ease of use and convenience. Moreover, the very high fixed costs required to set up a competing network throw up barriers to entry, which gives Paypoint a serious competitive advantage and in turn allows it to dominate the market.

But while the fixed costs of setting up a payments system are indeed high, variable costs of processing transactions are low, which makes incremental revenue highly profitable. The problem though is that consumers are gradually moving away from cash payments and increasingly use mobile and online payments. These are fast growing markets, but unfortunately, PayPoint has so far struggled to make any significant headway.

Still, the move towards a cashless future will be a very slow process, and cash remains the dominant payment method, accounting for nearly half of all customer transactions in the UK. Moreover, PayPoint continues to see strong growth from its retail service offering, where transactions increased by 17.8% last year, and there’s further scope for expanding its retail network in Romania.

PayPoint offers great value for money too. Analysts expect earnings to grow by 8% this year, which puts the stock on a forward P/E of 15.7. And if we strip out the £81m in net cash on its balance sheet, its forward P/E would drop to just 13.8. What’s more, the shares trade at yield of 4.3%.

Under-tapped market

Also offering great value for money is Provident Financial (LSE: PFG). Shares in the sub-prime lender are 11% lower than at the start of the year, but fundamentals remain broadly positive.

The sub-prime lending market may be a risky sector, but because the market is under-tapped, Provident benefits from limited competition and favourable growth prospects. Growth in earnings per share over the past five years has consistently been above 10%, and just last year Provident saw its pre-tax profits grow by 22%.

Looking forward, more growth could be yet to come. City analysts expect earnings to expand by 13% this year, and a further increase of 7% is pencilled-in for 2017. These estimates would put the stock on forward P/Es of 17.5 and 15.9, respectively. It’s therefore unsurprising that city analysts are bullish on the stock. Out of 13 recommendations, eight are strong buys, five are holds, with none recommending a sell.

Provident currently trades at a reasonable yield of 4%, but what’s most tempting about the stock is its dividend growth potential. Thanks to its strong capital position and a favourable outlook on earnings growth, its prospective yields for 2016 and 2017 are 4.3% and 4.7%, respectively.

Neil Woodford is a big fan of the stock too. Provident is the fifth biggest position in his CF Woodford Equity Income Fund, accounting for just over 4.5% of its portfolio value.

Jack Tang has no position in any shares mentioned. The Motley Fool UK owns shares of PayPoint. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Business manager working at a pub doing the accountancy and some paperwork using a laptop computer
Investing Articles

Are investors taking a massive gamble by chasing the BP share price higher?

Investors who thought the BP share price would continue to rocket as the Iran war intensifies may have been surprised…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Down 23%, consider this FTSE 250 share that’s boosted profit forecasts!

This FTSE 250 tech share's leapt 8% on Wednesday (18 March) after it raised full-year profit forecasts. Is now the…

Read more »

Woman riding her old fashioned bicycle along the Beach Esplanade at Aberdeen, Scotland.
Investing Articles

4 reasons the Rolls-Royce share price might be headed to £24

Could the Rolls-Royce share price double from around £12 to closer to £24? Here are a few reasons why it…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

How much passive income can you earn by investing £20,000 in a Stocks and Shares ISA?

With dividend yields up to 10%, REITs might be some of the top passive income opportunities for UK investors in…

Read more »

Group of friends meet up in a pub
Investing Articles

Diageo shares are back at 2012 levels. Time to consider buying?

Diageo shares have fallen around 65% from their highs and now trade at levels not seen for well over a…

Read more »

Investing Articles

Softcat: a FTSE 250 tech stock offering growth, dividends and value

Right now, the share price of FTSE 250 IT company Softcat is well off its highs. And at current levels,…

Read more »

Black woman using smartphone at home, watching stock charts.
US Stock

3 huge pieces of news that could impact the Nvidia share price

Jon Smith talks through some key reveals and implications for the Nvidia share price from the company conference taking place…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing For Beginners

This FTSE stock is now trading at the lowest level since the 1990s! Should I buy?

Jon Smith explains why a FTSE share is currently at multi-decade lows and might surprise some with his decision on…

Read more »